NVIDIA's (NVDA -10.01%) shares plummeted after it announced earnings results on Nov. 15, as it issued revenue guidance for the current quarter of $2.7 billion at the midpoint -- falling massively short of analysts' expectations of $3.4 billion.

Instead of guiding to revenue growth of nearly 17% for the quarter, the graphics processor manufacturer is now telling shareholders that it's expecting sales to drop by more than 7% from the same period a year ago.

An NVIDIA RTX 2080 Ti graphics card.

Image source: NVIDIA.

Let's go over what happened.

Cryptocurrency boom goes bust

As you might remember, there was a big boom in cryptocurrency prices. This led to massive industrywide demand for graphics processing units (GPUs) -- NVIDIA's main product line -- as those devices are used to run the computations necessary to mine cryptocurrencies, such as Ethereum

However, two things happened to crater demand for GPUs used for cryptocurrency mining. First, the general cryptocurrency market has plunged. Ethereum, for example, trades at just over $176, down from a peak of around $1,400 back in January. As digital tokens are worth less than before, the profitability of buying hardware and running up an electricity bill to produce them decreases substantially. 

Further, in a replay of an earlier phenomenon with Bitcoin, chipmakers like Bitmain have begun to produce specialized chips -- known as application specific integrated circuits, or ASICs -- to run the computations to produce the most valuable cryptocurrencies. Those ASICs have only one job in life and are ultimately far better at producing those cryptocurrencies than GPUs are. So, GPUs have largely been supplanted by ASICs for cryptocurrency mining. 

With that background in mind, we can now understand what happened to NVIDIA. 

Too much channel inventory

On the company's earnings call, NVIDIA CFO Colette Kress said that in the third quarter, the company's gaming business "was short of expectations as post-crypto channel inventory took longer than expected to sell through." 

"Gaming card prices, which were elevated following the sharp crypto falloff, took longer than expected to normalize," Kress explained. 

In the fourth quarter, NVIDIA is set to feel further pain from the issues around cryptocurrency. 

"Our Q4 outlook for gaming reflects very little shipment in the mid-range Pascal segment to allow channel inventory to normalize," Kress said. 

As a reminder, while NVIDIA launched its new Turing architecture-based GeForce RTX cards for the high end of the gaming market (and Kress said on the call that "Pascal high-end cards have largely sold through ahead of RTX"), the company's midrange gaming graphics cards are still based on the older Pascal architecture. 

What did the CEO have to say?

During the call, NVIDIA CEO Jensen Huang offered some additional color on what happened. 

"[We] came into Q3 with excess channel inventory post the crypto hangover," Huang admitted. However, the executive said that NVIDIA expected prices of the graphics cards sitting in the channel to decline. As a result of that decline, the company is betting that "[shipment] volume [will] be elastic with pricing."

The executive also said that he's optimistic that "now that pricing has stabilized, customers will come back and buy."

"I guess when pricing is volatile in the channel, it probably freezes some people waiting for prices to stabilize, and that took longer than we expected, frankly," Huang added. "But now that it's at the right levels, our expectation is that the market will return to normal."